Original Equipment Manufacturer (OEM)

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Definition of Original Equipment Manufacturer (OEM)

An original equipment manufacturer (OEM) is a company that produces and sells products or parts of a product that another company used as a component of their own products and ultimately sells the items to the customers.

This another company is referred to as a Value-Added Reseller (VAR).

By adding or enhancing features or services, it adds value to the original product item. VARs normally work closely with OEMs, which regularly customizes and manufactures designs and items based on the needs and specifications of VAR company.

OEMs commonly operate in the automotive and computer industries.

Original Equipment Manufacturer and Value-Added Reseller

Basically, Value-Added Resellers sell products manufactured by an OEM but incorporate certain added features or services before providing them to customers. The two works together. VARs help OEMs sell their products and on the other hand, OEMs entrust their products to VARs, allowing them to provide them with more features that will enhance the operation of the products.

While some OEMs do make complete items for a VAR to sell, they normally don’t take part in determining the finished item VAR companies’ market.

Common Examples

A usual example is the relationship between an OEM of individual electronic components and Sony or Samsung, companies that assembles those parts in making HDTVs. We also have, a maker of button that sells to Ralph Lauren its little fasteners customized with letters RL stamped on them.

Typically, the finished product goes out under the corporate brand name of VAR, thus, OEM does not play a significant role in the final item.

Traditionally, OEMs focused on business-to-business sales, while VARs sells to public or other end users. However, as of early 2019, an increasing number of OEMs are selling their parts or services directly to consumers, which makes them VAR.

OEM in Computer Industry

Typically, original equipment manufacturer, as used in the computer industry, refers to the company that buys products and then integrates or rebrands them into a new product under its own corporate brand.

Let’s say for example, Microsoft (OEM) supplies its Windows software to Dell Technologies (VAR), which incorporates it into its personal computers and sells a complete PC system directly to the public or the end users. Even if Microsoft is the OEM, the computer’s product guide for consumers most likely refer to Dell as the OEM.

Original Equipment Manufacturer and Aftermarket

While an Original Equipment Manufacturer makes original equipment, an aftermarket manufacturer on the other hand, produces items that are made to look like and work interchangeably with those of the OEM.

It means, an OEM is the opposite of the aftermarket. An OEM refers to something made specifically for the original product, while the aftermarket refers to an item made by another company that the end user may use as a replacement. Though the products are usually cheaper, there is no guarantee if this will function as well as an OEM.

Examples of OEM and Aftermarket

For example, a person needs to buy a car thermostat replacement. The original product is expressly created, let’s say, by Company XYZ for their Toyota. They may buy the OEM part, which is a duplicate of the original XYZ thermostat that was used in the original manufacturing of the vehicle. Or they may opt to buy an aftermarket part, which is an alternative made by another company.

This only means, if the replacement comes from Company XYZ (maker of original product), it is an OEM; otherwise, it is considered an aftermarket product.

Characteristics of an Original Equipment Manufacturer

OEM for Hardware Products

The term OEM in the hardware section of the IT industry has more than a few meanings. It can describe internationally known brands that purchase components from other companies and sell complete systems under their own corporate brand, such as, HP Inc., Dell EMC and Hewlett Packard Enterprise.

These companies source microprocessors, hard drives and equipment from OEM parts companies, which view them as OEM customers. Suppliers of component items create an OEM product and retail versions of these items. 

The most common types of components that are offered for as OEM are hard drives, optical drives and some PCI expansion cards. But many other products may be presented this way in limited numbers.

As to capabilities and performance, OEM hardware is just the same as its retail counterpart.

Though, the hardware usually doesn’t come with added components – even those that are critical to the hardware’s operation. Say, an OEM video card or hard drive often doesn’t ship with the cables or adapters necessary for its usage.

When compared to a retail warranty, the length offered might be reduced or non-existent. This is because it’s likely that the system manufacturer will offer it. Which means, there may also be restrictions on its warranty.

Since buying an OEM part makes you the manufacturer, you may find it impossible to receive direct support.

OEM for Software Products

OEM, or original equipment manufacturer, is a broad term that defines a web of relationships among IT hardware vendors, hardware component makers, software vendors including channel partners like resellers and distributors.

Formerly, OEM referred to the company that originally built a given item, which was then sold to other companies for them to process further, rebrand and ultimately, resell.

Over time, however, the term has become a label used to describe a variety of companies, including relationships among companies, in an increasingly complex IT supply chain.

Software companies sell OEM versions of their products to large hardware OEMs or smaller systems builders, who integrate the software in the products they sell.

The operating systems and third-party applications that ship to end users preinstalled on a multitude of products, such as smartphones, tablets, notebooks, PCs, etc., can be considered OEM software.

One of the most popular example of OEM software is Windows. 

When you purchase this software, you are normally provided with a sleeve that contains the software and a license key, without any documentation. In fact, most OEM licensed software comes without any technical support.

OEM software is usually licenses on a per-system basis. It means it can only be install on a specific computer and not on another. Theoretically speaking, OEM version of Windows is tied to the computer you installed it on, but Microsoft is known to be kind-hearted on this matter.

When you re-activate Windows, in only requires contacting their customer service. This is needed to remove the Windows 10 watermark. But as for Microsoft, it is not necessary, and other companies might be more restrictive.

It is a risk associated with OEM products. It might cost less, but there might be a need to re-purchase the software if you are to replace your PC or upgrade the motherboard, and the like.

OEMs Sell Licenses

OEMs usually offer product licenses to use their parts or products, software, etc. to the Value-Added Resellers they market to.

Vendors or sellers will give information and general guidelines for using their trademarked brand designs such as logos, etc. These guidelines typically seek to address proper usage of the trademark especially in various marketing and communication contexts. It also defines what would constitute trademark infringement. These are part of OEM partner programs.

Advantages of OEM Manufacturing

The following are the benefits:

  • Cost-effective products. Generally, when going down the OEM manufacturing route, you receive products with minimal costs.  You effectively benefit from the economies of scale as the supplier will produce bulk amounts of goods to sell to you and that are similar to others.
  • High quality goods. Products manufactured are tested according to the strict specialized testing standards of the company, thus, are produced with high quality. 
  • Specialized technology. OEMs are companies expected to have wide-functioning technologies. As a customer, you also get to benefit from it.

Say for example, a car manufacturer like Ford, may use specialized components of another company within their cars that they themselves do not have the expertise or technology to produce.

  • Trademarks/Intellectual Property Rights. Since your company is designing the components to be produced, you keep all trademarks and intellectual property rights associated with the design and products or service, as the case may be. It means all associated rights belong to you.
  • Efficient Professional Service. Given that OEM manufacturing company can only survive if it sustains the demand for a certain product category, which means they have to be sufficiently and effectively good at it.

In addition, companies as customers are typically considered more demanding the consumers or end users. Because you work exclusively and directly with OEMs, you benefit from their technical knowledge and service focus making any problems or demands be easily resolved.

Agreement with an OEM manufacturing gives companies more time to focus on their core operations. Basically, outsourcing the production job provides efficiency to companies, and ultimately taking advantage from lower prices, higher quality and specialized products.

Disadvantages of OEM Manufacturing

While there are numerous benefits of OEM, there still are some disadvantages such as:

  • Less opportunity to capitalize. Selection of OEM suppliers for specified special items is quietly small and do take time to establish, giving companies less opportunity to capitalize quickly on new and innovative goods. 
  • Not enough products to sell. Most OEM companies only like to transact with firms who can create a lot of demand. Which means, you might not be able to survive if you are selling not enough products.
  • Risk of infringement. Since you have formed the design for the components, there is an innate risk of having your intellectual property rights (IPRs) infringed or stolen by competitors.

In addition, the following are some fallbacks for having OEM products:

  • Companies need to establish a high minimum order quantity to buy OEM products, which entails higher costs for the companies.
  • Development costs of OEM products can demonstrate to be expensive.
  • Product improvements are driven by internal perspectives and not by the market needs and requirements.
  • Lack or sales and or product understanding can lead to higher demands for sales or technical assistance. This means costly travel expenses from OEM firms.
  • Since products of OEM companies are considered exclusive, product improvements that suit the real market requirements are limited for the reason that of having limited understanding by the end user or consumers.
  • OEM partnerships need to be thought out properly, giving equal protection of their interest.
  • Misunderstanding or issues between parties involved in the partnership may arise, resulting for this relationship not to work out.

Four Benefits for OEM Customers with One Supplier

In the past, most part manufacturers only designed and developed the various parts and components that were necessary for OEM customers.

However, in today’s competitive markets, it is not enough. These part manufacturers are driven to do more.

To further improve reliability, reduce costs and streamline manufacturing processes, original equipment manufacturer (OEM) customers may find one supplier that can support part manufacturers from the initial designs process through final delivery of products.

  1. More efficient procurement and design processes – this includes supplying a wide range of component alternatives, like inputs and outputs, different types and sizes of power supplies, packaging, etc.
  2. The need for additional testing, re-engineering and re-certification becomes obsolete – since all components from the same supplier are expected to run and function smoothly. It is often complicated working with different suppliers, with different ordering and supply protocols.

Frequently OEMs essentially are to buy a certain component from one supplier before they can specify the related components and parts from another.

  1. Simplified product qualification and manufacturing processes – having a single part number for purchasing, manufacturing and tracking makes it easy. This means, potential points of failure is lessen when a tested and warranted subassembly eliminates much of the engineering to incorporate components from a variety of suppliers.
  2. Collaboration of component supplier and OEM – component supplier is able to give technical expertise to the OEM’s design engineers and develop or improve and provide customized modules, giving a wide range of performance, size and I/O options.

This ultimately reduce costs and improve product design efficiency.